The real estate creative investing world continues expanding but hard money lenders have been around for a long time and continue to be viable today. When traditional loans aren’t available and/or long term privates loans and crowd funding will take too long to put in place, hard money loans remain a viable option. Yes, you’ll pay a higher interest rate but if you are flipping property or need a bridge loan to put less expensive financing in place, hard money can be your best answer.
Overall, hard money lenders generally don't value real estate in the same ways as investors and other real estate professionals. As an investor, you should know your local market inside out. You should instinctively have a good idea of the property value after a brief inspection.
What's different for hard money lenders is they typically lend money outside of their local market. Often across the country. Hard money lenders can't physically inspect the property themselves nor do they have a solid knowledge of local property values.
Hard money lenders don't use the standard underwriting process that banks use. Banks focus on the borrower's credit history and income. When a borrower can qualify for a bank loan, it is typically for 80% to 90% of the house value.
Hard money lenders focus on the value of the property instead of the borrower's creditworthiness. Since the lender's security is all in the property, they use more conservative valuation methods than other real estate professionals. While they will look at a professional appraisal, it's not the only valuation tool that hard money lenders typically rely on because these are geared towards bank loans.
Often, they want at least two and possibly three valuation models to make an educated decision from. Hard money lenders will look over the tax assessment records but again this isn't a reliable way of valuing real estate. Tax assessment districts calculate values on an annual basis at best and many only every other year. Also, the taxman only values property from the curbside. They don't have access to the inside of the house.
The broker's price opinion (BPO) is another tool hard money lenders use to value property. A BPO is a brokers assessment of the property value. However, hard money lenders are skeptical of these valuations as well because brokers have a tendency to over value properties in hopes of a higher listing commission and an optimistic view of the local real estate market.
The value a hard money lender puts on a property has nothing to do with the purchase price that you have negotiated. It will be based on what the market values the property at.
In the end, hard money lenders take all of the information available to make an educated determination. They ask themselves questions such as: "if the market bottoms out will I be able recover the money loaned for the property? Will I profit from this property even if I have to take control in the event of a default?”
To fully protect themselves, hard money lenders typically only lend 50% to 70% of the value of the property. As an investor, you'll either have to negotiate a purchase price in that range or have other financing available. Also, keep in mind that a hard money lender knows the fix and flip business as well as any investor. They'll want to know your exact plan for the property and have to approve that along with the value of the property.
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Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for 10 years. He also draws upon 30 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest. With the Pacific Ocean a couple of miles in the opposite direction.